Understanding CIF Contract: Rights And Obligations Of Sellers And Buyers, Essay.

On 1 January Kane Hound food Gmbh  contracts to sell to Ericksen Pets Ltd “1000 kilos of organic dog food” packed in 10 kg bags, and with a certificate of organic purity from the London Bow Wow Association of  Organic Dog Food. The contract specified delivery from Hamburg cif Southampton.

The contract stated that English Law was to apply to both choice of law and jurisdiction and all terms of the contract. The contract period was January.

The goods were taken to the docks on the 6th of January but were not loaded until the 8th of January. Unbeknownst to Kane 75 of the bags were damaged by rainwater due to the goods being improperly stored on the docks.

Payment was contracted to be made by “banker's letter of credit against documents”. The contract also stipulates that the documentary credit is to be opened immediately. On 10th January Ericksen instructs Son Bank in London to provide for the opening of the letter of credit in Kane’s favour.

On 16th January, Kane is informed by Dier Bank in Germany that a letter of credit has been opened in his favour for “£20,000 payable by draft 5 days after sight against the documents.”

On 24 January Kane presents Son Bank the following;

    • a commercial invoice,
    • a certificate of insurance
    • a bill of lading stating “goods shipped in apparent good order and condition apart from some evidence of water damage.
    • The documents also include a certificate of purity from the Welsh Woof Woof organic dog food association.

The bank refuses to take up the documents and authorise the payment to Kane.

The goods duly arrive in Southampton on the 30th January. Ericksen wish to reject the goods based on the fact that 750 kg have sustained water damage.

Discuss the rights and obligations of Kane and Ericksen in relation to a cif contract and the documentary credit arrangement.

Introduction to CIF Contract

The subject matter of the case is based on CIF contract. In general, contract is an agreement that binds the parties under certain legal obligations. CIF contract provides certain rights and duties specified for the seller and purchaser in a contract. The term CIF means cost, insurance and freight. These types of contract are usually made during the transportation of goods through ship. In case of such contract, the seller has to bear every kind of responsibilities unless the proposed goods are not delivered at the contracted place. Therefore, if any damage has been made during the delivery time, the seller should be responsible for the same. It has been observed in the case of Ross T Smyth v TD Bailey, CIF contract is mainly deals with shipment contract and such contract includes a large quantity of goods for transaction. According to the sub-language of International Trade Law, the purpose of CIF contract is to supply the goods in accordance with the terms of the contract that has been signed in between the parties. Through this contract, two things can be obtained such as contract for carriage and contract of insurance. In this contract, certain rights and duties of the buyer and the seller has been encountered. According to English common law, CIF contract includes cost, insurance and freight. Lord Wright has added that seller has to perform all the special requirements regarding the contracted goods. He has to collect the goods, serve a notice of appropriation, and obtain all the necessary bills and policies of insurance regarding the goods. The word freight that has been included under the abbreviated word CIF denotes the money paid by the person for the transportation of goods. These types of words are generally used in the contract that has been made through shipment. John Bouvier has defined the term as an agreed sum that should be paid entirely or partly to the parties during the transportation of goods from one part to another.   

It has been observed in this case that a contract has been signed in between Kane and Erickson regarding the delivery of dog foods and it has been contracted that Kane will deliver 1000 kilogram food to Erickson in the stipulated time period. According to the rules of CIF contract, seller is responsible to deliver the contracted goods, obtain all the necessary documents and bills for the buyer. It has been stated by Professor M G Bridge that under CIF contract, the buyer will get all the profits in regards to the contracted objects. However, there is a conflict to state the nature of the contract. According to some jurists, CIF contract is a sale of documents, while some are of the view that CIF contract is sale of goods. It has been observed in Couturier v Hastie, CIF contract is sale of goods by the means of documents. The specialty regarding the CIF contract is that the sellers are not obliged to deliver the goods to the buyer; rather they are obliged to transfer the goods and all the related documents to the buyer so that the buyer can get right against the insurer. However, the duties of the seller will be extended if additional duties are mentioned in the contract. The term additional duties denote the liability of the seller regarding the quality and fitness of the delivered goods and time of delivery details. After the seller has transferred the goods and submitted all the documents to the buyer, he will serve a notice of appropriation to the buyer, which will be returned to the seller on subsequent occasions. It has been mentioned in Kwei Tek Chao v British Traders & Shippers Ltd that if any goods arte rejected by the buyer, they should have no lien over them for the return of the price.

Rights and Duties under CIF Contract

The House of Lords had observed the following in the case of E Qemens Horst Ltd v Biddell Brothers:

“The buyers of a CIF cargo of hops shipped in San Francisco declined to pay upon the documentary tender, insisting that they first had the right to examine the goods to see that they conformed to the contract. If the buyers' contention had been sound, the sellers would have had the invidious choice of taking responsibility for the landing and warehousing of the goods, or of surrendering the bill of lading so that the buyer could carry out the examination, in which case they would lose the security that goes with retaining the bill of lading. In both cases, the CIF buyer's commercial risk would thereby be overturned, at least to the extent of any defects in the hops coming into light in the course of the buyers' examination”.  

Further, it was observed in Proctor Gamble Philippine Mfg Corps v Kurt A Becher GmbH &Co  that if all the contracted goods are delivered in time and the time of arrival of the goods in the bill of lading has shown wrong time; seller will not be held responsible if the buyer had accepted the goods at that time. Bill of lading is the documents of acknowledgement regarding the delivered goods. It has further been stated under the rules that if the delivered goods are not in accordance with the contract but the documents are, the buyer will have to pay for the documents only. However, in Kwei Tek Chao v British Traders and Shippers Ltd, it has been mentioned that the buyer can return or reject the non-conforming goods to the seller. Insurance plays an important part here and the seller will obtain the value of the insurance. Therefore, Kane is liable to deliver all the conformed goods and documents, papers for the insurance and provide proper information in the Bill of Lading. According to the law, these are the basic obligation of the seller under the CIF contract and in case of any failure, the buyer can take all the possible steps against him and may rescind the contract accordingly.  

Erickson is the buyer who has been sold the contracts by Kane. Therefore, both Kane and Erickson will have certain rights and obligations related to a CIF contract and the documentary credit arrangement. As per the principles of a CIF contract, the problem that occurs majorly is related to the rights of the buyers to reject the documents or the goods in a cost insurance and freight (CIF) contract. Thus, when Erickson wanted to purchase the goods from Kane, they had formed a CIF contract especially in the absence of a vender since the contract was bound by the principles of it.

Nature of CIF Contract

Therefore, when the CIF contract was formed between Erickson and Kane, the rights and obligations, which Ericken could have used being the buyer are to make an issue an invoice of the sold goods firstly. Secondly, the description of the goods in the contract should be provided at the port of shipment. The contract must be procured of affreightment based on which the goods will be delivered at the location contemplated by the contract thirdly. Fourthly, insurance should be organized on the terms and of the trade that will be available for the assistance of Erickson. These are the available rights to Erickson that he can exercise when a CIF contract is formed between the seller and the buyer. The purpose of letter of credit is to provide both the buyer and seller a sense of security. Therefore, Erickson can also make use of the letter of credit to protect and exercise its rights and obligations when needed. The documentary credit can be put to use only when it is the agreed method of payment in the sale of contract between the two contracting parties. However, method of payment took place between Kane and Erickson. Documentary credit highlights the usage of a bank, which is an entity with proper reputable good credit by being the seller and the buyer in order to effect payment. Letters of credit shows the exceptional features of it being used in the transaction of sale. Generally, it is considered to be flexible since the seller will have the right to decide and vote any bank by making it obligatory. Therefore, the buyer, Erickson has the power of being flexible in such cases. As per the law, it is linked to the documentary credits is uniform and transparent. Hence, the letter of credit usually activated by the buyer, Erickson by approaching the bank with n application for presenting shipping documents including bill of lading and certificates of insurance. When it comes to rights of the legal position of Erickson, he has the right and power to reject the documents if they are not arranged in order. Secondly, being the buyer, Erickson should reject goods if they differ from the contract of sale. As per the contract of CIF, it puts a number of obligations on the seller as well regarding the goods and documents. The goods delivered must match with the description of them provided in the contract. The buyer is under the obligation to check with the goods delivered to that of the contract. However, there are mentioned obligations and benefits under the documentary credit. The contracts that arise from the documentary credit agreement are set in plenty of actions that seem to be automatic. Erickson is provided with the same protection as Kane is. It is an outcome of the credit agreement formed between Kane and Erickson. The basic significant benefit for Erickson lies in the theory that the agreement of credit and the sale of contract are both considered to be separate. In case the buyer is associated with in a credit contract with the issuing of bank, it has to adhere with the instructions provided. This is applicable while dealing with the documents required and he is allowed to decline the goods when they are not complied with remaining statutes. This is possible only after Erickson has received the documents and the payment has been made. The buyer, Erickson has the right and power to sue the seller, Kane under the sale of contract for recovering the loss. Erickson can give proper and particular information and instruction to the bank for the purpose of requiring the documents that are significant. However, he can also reject the documents if they fail to comply with the requirements of the documents.

Rights and Obligations of Buyers and Sellers under CIF Contract

The name and the documentary credit number that generally results to the non-compliance. However, Erickson will have his certain rights and obligations with the help of which he can sue Kane, the seller. Such rights can be applied and exercised when there is mismatch of goods that are being delivered by the seller. There have been rapid advancing trade practices of such contemporary businesses. If the bank refuses to take up the documents then Ericksen can take actions against Kane. As per the CIF contract, the buyer, Erickson needs to pay against the tender of documents that are listed in the sale of contract. Therefore, Erickson cannot think of rejecting the payment of the price of the contract that is dependent on the original delivery of the goods. Erickson’s right is to enjoy two different and independent rights of rejecting the goods and documents. Even if the buyer has accepted the documents, it will not affect his right to reject the goods on arrival.

If there are defects in the documents that are obvious and the buyer has paid against them then he will have the right to decline or eliminate the goods that will be lost. If the date on the bill of lading is not correct and the seller is incapable to do anything about it then he will be liable for such an act. Thus, the seller will permit the buyer to claim for the actual damages stemming from the tender of the documents that are defective and sold. However, Erickson can avoid such disputes and claim for the damages in the contractual quality by drafting the sale contract.

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